Regulatory intelligence for US exporters

Chip Companies Report Concerns About Licensing Decisions, Lost China Sales

Semiconductor companies are still awaiting licensing decisions on their chip-related activities involving China under the U.S.’s new export controls, with some concerned that licenses awarded to their competitors could hurt their revenue. In earnings calls and filings with the Securities and Exchange Commission this month, U.S. chip and technology companies said they continue to prepare for drops in sales to China and that they fear Chinese customers may soon replace them with alternative suppliers, causing some U.S. companies to permanently lose their market share in China.

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NVIDIA said the new controls, announced by the Bureau of Industry and Security last month (see 2210070049), impose license requirements on shipments to China of “our A100 and H100 integrated circuits, DGX or any other systems or boards which incorporate A100 or H100 integrated circuits and our A100X,” as well as other exports. The chip company said it has spoken with Chinese customers to try to “satisfy their demand” with NVIDIA products not subject to the new license requirements, such as the company’s new A800 offering. The company announced the chip, which was specifically designed to meet new U.S. licensing requirements, earlier this month (see 2211080005).

But for Chinese customers that need products covered by the new controls, NVIDIA said it’s uncertain about its ability to obtain a license from BIS. The company said it has “no assurance that the [government] will grant any exemptions or licenses for any customer, or that the [government] will act on them in a timely manner.” NVIDIA said it could face a “disproportionate impact” brought on by the controls because some of its “competitors who sell products that are not subject to the new restrictions … may be able to acquire licenses for their products.”

And even if it receives a license from BIS, the agency may “impose burdensome conditions that we cannot or choose not to fulfill,” NVIDIA said. “The new requirements may benefit certain of our competitors, as the licensing process will make our sales and support efforts more cumbersome and less certain, and encourage customers in China to pursue alternatives to our products, including semiconductor suppliers based in China, Europe, and Israel.”

Applied Materials is also expecting a hit to its business and expects that the “unmitigated revenue impact of the new rules could be up to $2.5 billion” in fiscal year 2023, CFO Brice Hill said on a recent earnings call. He said the company is applying for export licenses and determining which of its customers can secure export authorizations and which customers may not be eligible. “We expect some customers may decide to change their plan or change their technology so it does not go above the threshold that's affected by the rules at this point,” Hill said.

Veeco Instruments, a U.S.-based capital equipment supplier, said it’s concerned its foreign competitors, who don’t have to apply for certain U.S. export licenses, could take over its market share in China. “The administrative processing, attendant delays and risk of ultimately not obtaining required export approvals pose a particular disadvantage to the Company relative to our non-U.S. competitors who are not required to comply with U.S. export controls,” Veeco said. “This difficulty and uncertainty has adversely affected our ability to compete for and win business from customers in China.”

It also said its foreign customers, instead of waiting for Veeco to secure a license, could develop “their own solutions to replace our products or by utilizing our foreign competitors’ products.” Some of its inventory may also be affected by “potential order cancellations” due to “recent U.S. government actions,” Veeco said. “While we continue to take steps to mitigate our exposure to this developing situation, if the sale of these products is delayed or we are unable to return or dispose of our inventory on favorable economic terms, we may incur additional carrying costs for the inventory or otherwise record charges associated with this inventory.”

The new U.S. restrictions also could hurt the ability of Pacific Biosciences of California, a biotechnology company, to “export certain products to China” and use certain integrated circuits in its products. “In many cases,” the company said, “these licenses are subject to a policy of denial and will not be issued.”

MKS Instruments, a U.S. provider of items used in advanced manufacturing processes, said the restrictions will limit its ability to do business with “primarily China-based companies involved in semiconductor manufacturing,” which the company expects to “negatively impact our revenues.” MKS called the new rules “complex” and “we are working on assessing their full impact.”

It also said BIS added several of the Chinese companies it does business with to the Unverified List. Under a new policy, BIS can move those companies to the more restrictive Entity List if they don’t allow BIS to complete an end-use check within 60 days of their placement on the UVL (see 2210070006 and 2211170069).

MKS said the pace of regulatory changes related to China, including export controls, has been “extraordinarily high” since 2019, which has led to increased compliance costs. “This trade uncertainty has caused, and may continue to cause, customers to delay or cancel orders, as they limit expenditures that could be affected by future actions and evaluate ways to mitigate their own tariff and cost exposure by sourcing from locally-based suppliers or suppliers based in other countries,” MKS said. “Such delays and cancellations could have a material impact on our business, financial condition and operating results.”

The chip industry and lawyers have faced challenges grappling with the new controls -- which they say are some of the most complex ever issued by BIS -- and are hoping for clarity in additional government guidance (see 2211010042 and 2211150044). BIS has issued one set of frequently asked questions so far and plans to release more on a rolling basis (see 2210310044).